Development

DACnews February 2015

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FEBRUARY 2015

Entering the post-2015 eraIn September of this year, with the validation of the Sustainable Development Goals (SDGs), the world will enter a new development era. This issue of DACnews looks at many of the new tools and approaches that will characterise that era: rules for defining what counts as official development assistance, incentives for taking development to scale, ways of measuring poverty and prosperity, and insights for shaping development policy, to name a few. In the feature article, it looks at the pivotal importance of tackling the particular needs of fragile states and situations if the SDGs are to be met.

New rules for what counts as ODA

On 16 December 2014, the DAC’s 2014 High Level Meeting issued a communiqué that sets out new rules for reporting and classifying official development assistance (ODA) loans provided by DAC members. Under the new rules, the grant or “concessional” portion of loans must meet higher standards than before and only this grant portion of a loan will count as ODA.

When the rules defining what counts as ODA were first set over 40 years ago, it was‌agreed that a loan must be “concessional in character” and have a grant element of at least 25%, calculated at a discount rate of 10%. However, as development finance has evolved over time, variability in donor interpretations regarding the meaning of "concessional in character" has led to reported figures not being endorsed by all members.

The new rules will apply a quantitative definition of concessionality. The grant element will still be calculated, but using a differentiated discount rate, consisting of a base factor aligned with the IMF discount rate (currently 5%) and a “risk-adjustment factor” (1% for upper middle-income countries, 2% for lower middle-income countries and 4% for least developed and other low-income countries). The grant portion of a loan to least developed and other low-income countries must now meet a minimum 45% grant element floor. The floor has dropped for wealthier countries – to 15% for lower middle-income countries and 10% for upper middle-income countries.

This so-called grant equivalent system provides a more accurate assessment and ‌comparison of donor effort: grants score more ODA than loans and the softer the terms and conditions of the loan, the more ODA credit the provider receives. Combined with the differentiated discount rates, the grant equivalent system will incentivise lending on highly concessional terms to least developed countries and other low-income countries, and will also better reflect the donor effort in lending to these riskier countries.

The new rules also make ODA better reflect donors’ current development co-operation policies. The former cash-flow based system “rewarded” donors in times when their loan portfolios were increasing and “penalised” them considerably later when loans were repaid. Consequently, ODA in any given year was greatly influenced by the development co-operation policies of the past.

The new rules will be implemented over a transition period of three years and will become the standard from 2019 reporting on 2018 ODA.

How is the new system better than what it replaces?

According to Mark Lowcock, Permanent Secretary of the UK’s Department for International Development and Chair of the group that led the discussions on the new framework for measuring ODA, it has improved in six important ways:

It incentivises (i.e. rewards, in terms of the amount of ODA recognised) the provision of aid in the form of grants rather than loans, and within the lending components, it incentivises cheaper loans over more expensive ones.

It incentivises lending to least developed and other low income countries (where most of the problems the DAC is concerned with tend to be concentrated) over lending to middle income countries.

It provides additional safeguards to rule out ODA loans to countries where the IMF and/or World Bank think there is a risk of excessive debt being built up.

It retains scope to associate ODA lending with other development finance.

It is more transparent: full details of all ODA lending will be made public, and figures will be published showing how the new system compares with what would have been reported under the old one.

It provides for regular review and updating as the wider world (e.g. global interest rates) changes.

DAC members also agreed to reverse the decline in ODA to least developed countries and other countries facing the greatest challenges, such as small island developing states, landlocked developing countries and fragile states.

Finally, the communiqué establishes a roadmap to develop a new statistical measure to complement the ODA measure, covering both ODA and non-ODA flows, so as to lend clarity to the overall picture of sustainable development financing. The draft components of this total official support for sustainable development measure (TOSD – its working title) are up for consultation and are being shaped by stakeholders in the lead-up to the Third International Conference on Financing for Development in Addis Ababa in July and the United Nations General Assembly on the Post-2015 Sustainable Development Goals in September.

In the words of Erik Solheim, Chair of the DAC, “This modernisation of official development assistance comes at an important time now as the world prepares for post-2015 and a new set of sustainable development goals.”

‘’To eradicate poverty and continue the huge development success of the past decades,” concluded Mr. Solheim, “we need to direct more development assistance and concessional loans to the poorest nations and mobilise much more private finances for development."

DAC Prize 2015

The second edition of the DAC Prize for Taking Development Innovation to Scale will be issued in 2015. The call for submissions is open until 30 April 2015.

The past decades have seen unprecedented development progress in all regions of the world, including success in halving extreme poverty. The DAC prize recognises those who have contributed to this success, investing systematically and strategically in innovations to solve development problems and scale-up these solutions. It celebrates achievement in the belief that success is contagious.

The DAC Prize received over 40 submissions in 2014, its first year. The winner­ – Katalyst from Bangladesh – and several finalists travelled to Paris for the award ceremony in the context of the DAC Senior Level Meeting last fall. Katalyst offers a great example of how development innovation has been taken to scale and is making a difference in people’s lives.

2015 Global Forum on Development

On 1 April 2015, the OECD will convene the Global Forum on Development with the theme “Post-2015 Financing for Sustainable Development”, closing a three-year cycle under the overarching theme of “Preparing for Post-2015”.

In mid-2015, attention will be focused on the Third International Conference on Financing for Development (FfD), taking place in Addis Ababa in July. The task is monumental: to gather the necessary financial (and other) resources to deliver the Sustainable Development Goals (SDGs), a universal and ambitious agenda covering social, economic and environmental sustainability.

The 2015 Global Forum on Development will explore the interaction of different streams of finance, as well as country experiences in managing them. The OECD works with its members and partners on many fronts to improve the enabling environment for domestic and international resource mobilisation: the smart use of official development assistance, effective development co-operation, fair and credible tax systems, sound investment and climate policies, among others.

The Forum, involving governments, business and civil society, will debate questions including:

How do developing countries interpret the global policy agenda on the ground?

What are the views and roles that non-state actors (such as the private sector, civil society, foundations and institutional investors) can play in the implementation of the SDGs?

What contribution can the OECD offer to unlock financing for the new development agenda?

The Forum will contribute to an OECD package of tools and policy advice on financing for development in support of the SDG process.

2015 Arab-DAC Dialogue on Development

Arab countries and institutions are among the world’s main providers of external financing for development. For this reason, engaging with Arab countries – especially Kuwait, Qatar and the United Arab Emirates – and with the members of the Arab Co-ordination Group Institutions (ACGI) is a priority for the DAC’s Global Relations.

On 26-27 January 2015, DAC members and Arab countries and institutions met at the 2015 Arab-DAC Dialogue on Development, hosted by the OECD in Paris. During this meeting, they discussed how to strengthen the means of implementation of the Sustainable Development Goals, particularly in the areas of ensuring sustainable energy for all and reducing trade and investment costs to promote the private sector’s contribution to development. Among several follow-up actions, participants agreed to:

strengthen partnerships to ensure sustainable energy for all, including through a joint ACGI-DAC task force on energy

share more information about flows and activities targeted at promoting the private sector’s contribution to development

DAC Development Debates

Measuring poverty and shared prosperity

At the DAC Development Debate (DDD) on 2 December 2014, the World Bank’s research group presented its report A Measured Approach to Ending Poverty and Boosting Shared Prosperity. The report looks at what is needed to measure the new two “twin goals” that the World Bank adopted a year ago to guide its work: ending extreme poverty by 2030 (understood as less than 3% of the world population living in extreme poverty); and boosting shared prosperity in every society (understood as growth that benefits the bottom 40% of the population). These two goals will shape the work of the World Bank over the coming years. The report recommends policies that target both goals in unison (for example, inclusive growth policies, pro-poor policies, distributional policies) and makes a strong case for increasing support to statistical capacity at the country level for the collection and analysis of relevant data (e.g. household survey data).

Peter Lanjouw (Research Manager) and Dean Jolliffe (Senior Economist) of the Development Economics Research Group, World Bank Group led a debate on the policy challenges highlighted by the report:

Poverty goal: It would require an average of 4% GDP growth in all developing countries to achieve the poverty goal – something that will be hard, if not impossible with business as usual. Also, the closer the world gets to the 3% target, the more difficult it will be to reduce deeply entrenched poverty.

Shared prosperity goal: Continued growth along the lines of the distribution patterns of the previous decades will not be sufficient. A particular focus on the nature and patterns of growth will be necessary, with an emphasis on pro-poor and inclusive growth. By boosting shared prosperity the Bank aims to foster the well-being of the bottom 40% of the population in all societies.

Measurement challenges: Poverty and prosperity indicators cannot be measured using data like GDP; household survey and complementary data are essential for this.

The World Bank presented the findings of its annual flagship publication, The World Development Report, at the 23 January DAC Development Debate. The 2015 report, Mind, society and behavior, argues that development policies based on new insights into behavioural economics will help governments and development practitioners tackle challenges such as poverty reduction, climate change and others. Varun Gauri, Senior Economist with the Development Research Group of the World Bank and Co-Director of the World Development Report, cited many examples to demonstrate that people are rarely as coherent, forward-looking, strategic or selfish as typically assumed in traditional economic models; rather, many intrinsic and extrinsic motivations and dynamics (ideology, social dynamics) play important roles in their decision making processes. These insights can be used to improve the design and implementation of development policies and interventions that target human choice and action, for example to promote compliance with non-economic rules and standards (for example human rights) and to incentivise "good" behaviour.

POINT OF VIEW: Humanitarian effectiveness

On face value, the humanitarian sector of development co-operation has all the necessary assets for delivering effective responses. Nonetheless, it is not yet producing consistent, optimal results.

In the run-up to the World Humanitarian Summit in May 2016, the OECD has released a working paper to provoke debate and stimulate further thinking and study around humanitarian effectiveness, and what it means for donors and other stakeholders. It is interesting to note that the donors interviewed for this study – eleven major players in the global humanitarian sector (collectively they provided USD 8.23 billion of funding in 2012) – are broadly aligned in their definitions of the factors that are important for humanitarian effectiveness, and on what needs to be done to increase effectiveness in the face of both recurring and new global and local challenges.

The paper argues that the various stakeholders – e.g. operational actors, such as the United Nations agencies, the Red Cross family and NGOs; affected populations and states; donors and policy makers – can’t be put into neat boxes. Nonetheless, they all can, and should, be held accountable for their contributions to humanitarian effectiveness. Arguably, a system of collective responsibility and mutual accountability would work best to this end: under a common framework for humanitarian effectiveness, each actor would be held accountable for their contribution according to the same effectiveness criteria, no matter who assesses them.

The OECD paper proposes four sets of characteristics that define humanitarian effectiveness, and the criteria for measuring performance on them:

Shared responsibility, but with different roles: Programmes should be grounded in comparative advantage, they should be forward-looking, and they should respect fundamental humanitarian principles.

Effective programme design: Programmes should aim to maximise reach, be adapted to the context, be demand-driven, focus on results, and provide good value for money.

The right tools and partnerships: Programmes should be predictable and flexible; they should be timely and co-ordinated, with all actors working together in partnership.

System-wide learning, and accountability: Humanitarian effectiveness must be measured, demonstrated and improved.

DAC members are already making changes to their systems and processes to respond to these criteria. Many of these changes have been part of wider organisational processes, often brought on by a tight fiscal environment, a push for value for money, or changes in government policy. Reforms have included changes to quality control processes, a shift towards more active and comprehensive risk management, and creation of stronger links with foreign policy and/or development and stabilisation programming. All of this, in my view, is positive.

What next? The 2016 World Humanitarian Summit will offer a useful opportunity to tackle the question of humanitarian effectiveness head on, providing a forum where the broader humanitarian sector can agree on a common framework to hold all actors accountable. At the OECD, we will continue to facilitate debate around humanitarian effectiveness and to promote the use of shared values for the design of better, results-driven, context-appropriate responses. In this way, we can hopefully enable people that face risks of urgent, life-threatening suffering to make the best possible decisions about how to protect themselves and those for whom they are responsible.

FEATURE ARTICLE: Fragility in the post-2015 development eraby Sarah Cliffe

This month’s feature article is by Sarah Cliffe, Director of the Center on International Cooperation. She argues for the importance of ensuring that the particular needs of fragile and conflict-affected states are prioritised in the post-2015 agenda. Drawing on the OECD’s upcoming report, States of Fragility 2015: Meeting Post-2015 Ambitions, she stresses that thinking seriously about tackling fragility is an essential pre-condition for achieving the SDGs.

The year 2015 marks a potential turning point for international development co-operation, particularly in fragile and conflict-affected states, as countries from around the world will come together to finalise the successor framework to the Millennium Development Goals (MDGs). The OECD’s report, States of Fragility 2015: Meeting Post-2015 Ambitions (to be released on 26 March 2015), offers new analysis on monitoring and tackling fragility at this pivotal time for framing the post-2015 agenda.

The post-2015 Sustainable Development Goals, or SDGs, are poised to be much more ambitious than their predecessors, calling for an end to poverty “in all its forms everywhere”. Compared to the MDG’s relatively easier challenges – for instance, halving world poverty – in order to “get to zero” by 2030 the SDGs will have to place priority on ensuring that development resources reach the poorest and most marginalised communities and households. In this respect, there is one major group of states that is most likely to be left behind: the fragile and conflict-affected states.

Although fragile and conflict-affected states have made some progress on the MDGs, they largely have lagged behind other developing nations on major indicators. States of Fragility 2015 finds that nearly two-thirds of states now considered “fragile” are expected to fail to meet the MDG goal of halving poverty by the end of 2015. Just one-fifth will halve infant mortality by then, and just over one-quarter will halve the number of people who do not have access to clean water. Trends also point to a growing concentration of absolute poverty in these states. Today, fragile and conflict-affected states are home to 43% of people living on less than USD 1.25/day and according to predictions, by 2030 this concentration could be 62% or higher.

Unless their particular needs and circumstances are addressed, fragile and conflict-affected states will continue to be left behind and the “zero-based” agenda will fail. The currently proposed SDGs set out ambitious goals around ending hunger, ensuring healthy lives, and promoting sustained and inclusive economic growth (among other priorities) that will be particularly challenging for fragile and conflict-affected states. If the international community wants to achieve the SDGs, we will have to start thinking seriously about tackling fragility.

So how do we make progress?

First, we need to move away from the current fragile-states list to the recognition that fragility can affect all countries, not only developing ones. To this end, States of Fragility 2015 proposes a new, universal approach that assesses countries in light of five dimensions of fragility, based on the goals outlined by the SDG framework. In other words, fragility is expressed in several dimensions where challenges are highest to achieve: peaceful societies; access to justice for all; effective, accountable, and inclusive institutions; economic inclusion and stability; and capacity to prevent and adapt to shocks and disasters. States might be vulnerable in one, several, or all of these categories; mapping this vulnerability gives us a fuller picture of the issues each country grapples with and helps policy makers to better identify priorities. It will be important to adapt and update this working model in line with the SDGs once they are finalised.

Second, we must recognise that fragile and conflict-affected states have particular needs, especially in the areas of peace and justice, and that aid distribution should be better in addressing those needs. The Peacebuilding and Statebuilding Goals have identified five priority areas of need: legitimate politics, security, justice, economic foundations, and revenues and services. All of these areas remain underfunded: only 4% of ODA is allocated to political institution-building, while 2% goes to security and 3% to justice. The Somalia Compact offers a good example of how the international community can take into account the special needs of fragile and conflict-affected states in development planning and aid flows. Fragile states could certainly benefit from more of this sort of programme.

Third, it’s not enough to simply increase aid. We need to be smarter in how we use aid, and we need to encourage finance beyond aid. Aid can be made smarter by aligning it with positive political dynamics that can avert conflict. For example, “matching funds” can match aid to inclusive reforms, transparent public financial management, and domestic revenue generation. New technology is playing a role in facilitating direct cash transfers, cutting down on the potential for corruption and fostering positive peace-building action. South-South and non-traditional co-operation models can be especially effective in enabling countries to share their lessons and experiences. Beyond aid, remittances are the largest source of income to fragile and conflict-affected states as a group – larger even than aid – although they are concentrated in specific countries with large diaspora communities. Remittances could be further encouraged by reducing the transaction costs imposed on money transfers. Foreign direct investment (FDI) remains low in fragile and conflict-affected states because of the risks of investing there. States could be supported in courting FDI by providing training in negotiating and navigating complex private-sector deals, or better incentives for “first mover” equity investments could be provided through blends of public and private funds. Crucially, action on illicit financial flows and tax co-operation can also help capture much-needed funds for public investment. Harnessing a wide variety of funding sources beyond ODA will be essential if progress is to be made.

Finally, both national ownership and international commitment will be needed to reduce fragility and achieve the SDGs worldwide, and particularly in fragile and conflict-affected states. Reducing violence, building trust in government, and improving the quality of public services are key areas in which multi-sectoral national and international support will be needed.

The year 2015 presents us with the opportunity to make real development progress in fragile states. The introduction of the Sustainable Development Goals will usher in a new era. We must seize this opportunity and make sure that fragile and conflict-affected states are a priority in the post-2015 agenda.

NEWS IN BRIEF

From now on all countries are developing countries

On 19 January the OECD and the Executive Director of the United Nations Sustainable Development Solutions Network (SDSN), Guido Schmidt-Traub, convened an expert meeting to discuss potential indicators for the Sustainable Development Goals (SDGs). Their discussions were centred on the latest version of the SDSN’s proposal for SDG indicators, which incorporates comments from hundreds of organisations. Participants proposed several modifications and agreed on the need to limit the number of indicators to no more than 100. Mr. Schmidt-Traub remarked that “from now on all countries are developing countries” as no country has fully achieved all the universal development goals to date.

The Global Partnership for Effective Development Co-operation kicked off 2015 with its seventh Steering Committee meeting on 19-20 January at The Hague, the Netherlands. This first gathering was hosted by the three new Co-Chairs: Goodall Edward Gondwe Malawi’s Minister of Finance, Economic Planning and Development; José Antonio Meade Kuribreña, Mexico’s Secretary of Foreign Affairs; and Lilianne Ploumen, the Netherlands’ Minister of Foreign Trade and Development Co-operation. They led a discussion on priorities for the Global Partnership over the next two years. A collection of multi-stakeholder case studies was presented, illustrating the ways in which the Busan principles can produce strong results in the form of better development co-operation policies and practices on the ground. The Steering Committee also looked at how the Global Partnership can tailor its contribution to the post-2015 development agenda.

H. E. Kaifala Marah, Minister of Finance and Economic Development of Sierra Leone and Co-Chair of the International Dialogue on Peacebuilding and Statebuilding, visited the OECD on 18 December 2014. He emphasised the importance of using the New Deal to anchor effective response to the Ebola crisis. Thinking beyond humanitarian assistance to build institutional capacity will be particularly important in responding to future crises and the emerging forms of fragility that are created or compounded by the Ebola outbreak. Minister Marah discussed the current situation in Sierra Leone with respect to Ebola and suggested opportunities for engagement with the OECD-DAC, notably on innovative transition financing in Ebola-affected countries, and support for skills acquisition, training and capacity development. For more details on Minister Marah’s visit see the International Dialogue article in English and French.

The DAC Creditor Reporting System is the only international standard for comparable and accurate activity-level data and statistics on total development finance flows. In order to further enhance the transparency of its data on development finance – ensuring that they are easy to extract, locate, and compare - the OECD-DAC has made its Creditor Reporting System (CRS) 2012 and 2013 data available in XML format. These data cover all donors that report to the CRS, including non-DAC countries and multilateral agencies. Separate files are provided for each donor and recipient to facilitate data processing and thereby serve the needs of diverse audiences and ensure that these data can be used widely.

Geographical Distribution of Financial Flows to Developing Countriesprovides comprehensive data on the volume, origin and types of aid and other resource flows to around 150 developing countries. The data show each country’s intake of official development assistance as well as other official and private funds from members of the OECD Development Assistance Committee (DAC), multilateral agencies and other key donors.

DCD is looking for an experienced international development finance professional to lead work to enhance our understanding and application of best practices in leveraging private finance through official development aid and other official flows of external development finance.

Senior Policy Analyst - Monitoring and managing for development results(Job Number: 09729) DCD is looking for an experienced development professional who will be responsible for bringing together the Directorate’s work on monitoring, management for results and evaluation into a more coherent framework.

Policy Analyst - Managing for Development Results (Job Number: 09728) DCD is looking for a policy analyst whowill contribute to the work on enhancing the impact of development co-operation through improved evidence in the context of the 2015-16 Programme of Work and Budget, and to managing for results in development co-operation.

Policy Analysts – Peer Reviews (Job Number:09727) DCD is looking for Policy Analysts to join a dynamic team responsible for writing the six reviews delivered annually by the Review, Evaluation and Engagement Division.